Yum China Reports Full Year Operating Profit of US$640 million, up 31% year-over-year Led by Margin Expansion and New Unit Openings; Board Authorizes Share Repurchase Program

2017-02-08 05:30

SHANGHAI, Feb. 8, 2017 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the full year and fourth quarter ended December 31, 2016. Reported GAAP results include Special Items, which are excluded from non-GAAP measures. Special Items are not allocated to any segment and therefore only impact reported results of Yum China. See Reconciliation of Reported Results to Non-GAAP Measures within this release.

The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock.

Full-Year Highlights

Total system sales grew 5%, including growth of 6% at KFC and 3% at Pizza Hut Casual Dining, excluding foreign currency translation ("F/X").

Opened 575 new restaurants for the full year, or 5% net growth, surpassing 7,500 restaurants in China.

Same-store sales were flat, with an increase of 3% at KFC, offset by a decline of 7% at Pizza Hut Casual Dining.

1 See Reconciliation of Reported Results to Non-GAAP Measures included in the accompanying tables of this release for further details.

Note: All comparisons are versus the same period a year ago.

Consistent with prior years, Yum China's fiscal fourth quarter includes September, October, November and December results.

CEO Comments

"This was a momentous year for Yum China. We successfully became an independent, publicly traded company while simultaneously improving our business performance and investing for future growth. At year end 2016 with over 7,500 restaurants nationwide, we extended our market-leading position in China," said Micky Pant, CEO.

"For our shareholders, we exceeded our 2016 financial targets* in operating profit, restaurant margin and adjusted EBITDA. We continue to focus on our long-term growth formula: new unit development, same-store sales growth, and continued restaurant margin improvement. Right now, our top priority is consistently delivering positive same-store sales growth. During 2016, we continued to build a foundation for long-term growth with emphasis on product innovation, investments in refurbishing our restaurants, and focus on digital engagement with our customers.

2016 was a ground breaking year for Yum China in Digital and Delivery. Our loyalty programs have over 80 million members between KFC and Pizza Hut and are ranked #1 in the restaurant industry worldwide in terms of number of members. Total delivery sales reached approximately US$700 million, and in 2016, we were #1 among restaurant operators in terms of online sales in China. Cashless payment accounted for about 30% of our company sales.

Yum China has a long and successful track record of doing business in China, and 2017 marks the 30th anniversary of the launch of KFC in China. While we have achieved a lot in the past three decades, our growth plans give us confidence that we are well-positioned to drive strong operating performance and generate high returns for our shareholders over the long run. We believe the majority of our restaurants in China are yet to be built."

*

As detailed in our October 2016 investor conference.

New-Unit Development and Asset Upgrades

We believe development opportunities across China will provide us with new restaurant growth for all of our brands. Increasing urban population, continued development of city clusters and new transportation hubs provide growth opportunities for our nationwide development team.

Opened 575 new restaurants for the year and 302 for the fourth quarter, driven by development of the KFC brand.

96 of the new restaurants were opened in 56 new cities.

Remodeled 791 restaurants, focused on KFC. Over 75% of Yum China's current store portfolio has been remodeled or built in the past five years.

Opened first Taco Bell restaurant in Shanghai, China.

New Units

Restaurant Count

Fourth

Quarter

Full Year

Full Year

% Change1

Yum China

302

575

7,562

5%

KFC

179

323

5,224

4%

Pizza Hut Casual Dining

87

178

1,714

9%

Pizza Hut Home Service, Little Sheep, East Dawning and Taco Bell

36

74

624

4%

1 Represents year-over-year change

Digital and Delivery Annual Update

Digital and delivery provide us with new growth opportunities. We are aggressively embracing leading technologies such as location-based service and mobile payment. Our delivery business has continued to grow with our own network and with the help of aggregators.

Members in the loyalty programs increased to over 60 million for KFC and over 20 million for Pizza Hut Casual Dining at year end.

Mobile payments reached about 17% of company sales in 2016, with over $2 billion in company sales paid using cashless payment methods.

Pursuant to the strategic investment agreement between Yum China, Primavera Capital Group ("Primavera"), and Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. ("Ant Financial"), collectively referred to as strategic investors, Yum China issued approximately 19 million shares of common stock to Primavera and Ant Financial on November 1, 2016. The reported full year 2016 diluted share count of 369 million is based on the weighted average number of days for the period that the shares or dilutive equity awards were outstanding, and includes only two months of impact from the shares issued to our two strategic investors on November 1, 2016 and public company stock compensation programs. On a pro forma basis, assuming all shares and dilutive equity awards were issued and outstanding on January 1, 2016, the total diluted share count would be 395 million. This would have reduced diluted EPS to $1.27 from $1.36.

(in US$ million, except for per share data)

Reported

Pro Forma

Adjustments

Pro Forma

Net Income - Yum China

$

502

————

$

502

Weighted average diluted shares outstanding

369,143,838

26,208,256

395,352,094

Diluted Earnings Per Share

$

1.36

————

$

1.27

Share Repurchase Program

The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock. These shares may be repurchased from time to time in the open market, through privately negotiated transactions or other programs, subject to market conditions and other factors.

Conference Call

Yum China Holdings, Inc. will host a conference call to review the Company's financial performance and strategies at 7:00 p.m. US Eastern Time on Tuesday, February 7, 2017 (8:00 a.m.Beijing/HK time on February 8, 2017). A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com

US:

+1-845-675-0437 or +1-866-519-4004

Hong Kong:

+852-3018-6771 or 800-906-601

Mainland China:

400-6208-038 or 800-8190-121

International:

+65-6713-5090

Passcode:

Yum China 2016

A replay of the conference call may be accessed by phone at the following numbers until February 15, 2017:

US:

+1-855-452-5696 or +1-646-254-3697

Hong Kong:

+852-3051 2780 or 800-963-117

International:

+61-2-8199-0299

Passcode:

52095978

The webcast and the playback can be accessed via the internet by visiting the Yum China Holdings, Inc. website, http://ir.yumchina.com

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as "expect," "expectation," "believe," "anticipate," "may," "could," "intend," "belief," "plan," "estimate," "target," "predict," "likely," "will," "should," "forecast," "outlook" or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements include, without limitation, statements regarding the future business plans and earnings and performance of Yum China, anticipated effects of population and macroeconomic trends, and statements regarding the capital structure of Yum China. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks and uncertainties that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or assumptions will be achieved. The forward-looking statements included in this press release are only made as of the date of this press release, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to achieve development goals at the times and in the amounts currently anticipated, if at all, the success of our marketing campaigns and product innovation, our ability to maintain food safety and quality control systems, our ability to control costs and expenses, including tax costs, as well as changes in political, economic and regulatory conditions in China. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in the Information Statement included in our Registration Statement on Form 10) for additional detail about factors that could affect our financial and other results.

About Yum China Holdings, Inc.

Yum China Holdings, Inc. is a licensee of Yum! Brands in mainland China. It has exclusive rights in mainland China to KFC, China's leading quick-service restaurant brand, Pizza Hut, the leading casual dining restaurant brand in China, and Taco Bell, which opened its first restaurant in China at the end of 2016. Yum China also owns the Little Sheep and East Dawning concepts outright. Yum China is well positioned for growth thanks to its strong competitive position, integration of its brands into Chinese popular culture and consumers' daily lives, expanding geographic footprint in China and existing operational expertise. It has a strong capital position, no external debt and expects to continue growing its system sales and profit by adding new restaurants and through growing same-store sales. Yum China had more than 7,500 restaurants and more than 420,000 employees in over 1,100 cities at 2016 year end. A new generation of younger consumers who are digitally sophisticated and brand driven are fueling growth in consumption in China. The ongoing growth of the middle class and urban population in China is expected to create the world's largest market for restaurant brands, with Yum China poised to be the market leader.

and nil shares issued and outstanding at December 31, 2016 and 2015, respectively

4

————

Treasury stock

(20)

————

Additional paid-in capital

2,352

————

Retained earnings(a)

40

————

Parent Company Investment(b)

————

1,791

Accumulated other comprehensive income

1

130

Total Equity - Yum China Holdings, Inc.

2,377

1,921

Noncontrolling interests

66

58

Total Equity

2,443

1,979

Total Liabilities, Redeemable Noncontrolling Interest and Equity

$

3,727

$

3,201

(a) Retained earnings represent the Company's earnings after taxes generated from November 1, 2016 to December 31, 2016.

(b) Parent Company Investment represents Yum! Brands, Inc.'s ("YUM") historical investment in the Company, the Company's accumulated net earnings after taxes, and the net effect of transactions with and allocations from YUM. Upon the spin-off, Parent Company Investment was reclassified into the Company's common stock and additional paid-in capital.

Yum China Holdings, Inc.

Consolidated and Combined Statements of Cash Flows

(amounts in US$ million)

(unaudited)

Year ended

12/31/16

12/31/15

Cash Flows - Operating Activities

Net income - including noncontrolling interests

$

514

$

328

Depreciation and amortization

402

425

Closures and impairment expenses

78

64

Refranchising gain

(15)

(13)

Deferred income taxes

(40)

29

Equity income from investments in unconsolidated affiliates

(54)

(41)

Distributions of income received from unconsolidated affiliates

35

21

Excess tax benefit from share-based compensation

(2)

(3)

Share-based compensation expense

16

14

Gain from changes in fair value of financial instruments

(21)

————

Changes in accounts receivable

(54)

(5)

Changes in inventories

(96)

61

Changes in prepaid expenses and other current assets

7

(8)

Changes in accounts payable and other current liabilities

123

31

Changes in income taxes payable

6

(14)

Other, net

(35)

21

Net Cash Provided by Operating Activities

864

910

Cash Flows - Investing Activities

Capital spending

(436)

(512)

Changes in short-term investments, net

(83)

————

Proceeds from refranchising of restaurants

32

27

Proceeds from disposal of aircraft

19

————

Other, net

(3)

(8)

Net Cash Used in Investing Activities

(471)

(493)

Cash Flows - Financing Activities

Net transfers to Parent

(357)

(214)

Payment of capital lease obligations

(3)

(2)

Excess tax benefit from share-based compensation

2

3

Proceeds from issuance of common stock and warrants

460

————

Other, net

(7)

————

Net Cash Provided by (Used in) Financing Activities

95

(213)

Effect of Exchange Rate on Cash and Cash Equivalents

(28)

(17)

Net Increase in Cash and Cash Equivalents

460

187

Cash and Cash Equivalents - Beginning of Year

425

238

Cash and Cash Equivalents - End of Year

$

885

$

425

Reconciliation of Reported Results to Non-GAAP Measures (amounts in US$ million, except for number of shares and per share amounts) (unaudited)

In this press release:

The Company provides certain percentage changes excluding the impact of foreign currency translation ("F/X"). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

System sales growth includes the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales on the Consolidated and Combined Statements of Income; however, the franchise fees are included in the Company's revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.

Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the Company system one year or more.

Company Restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin as a percentage of sales is defined as Restaurant profit divided by Company sales.

In addition to the results provided in accordance with US Generally Accepted Accounting Principles ("GAAP") in this press release, the Company provides non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings (Loss) Per Common Share before Special Items, effective tax rate before Special Items and Adjusted EBITDA. Included in Special Items are reversal of (provision for) losses associated with planned sales of aircraft, incremental restaurant-level impairment upon spin-off, changes in fair value of financial instruments and impact of the redemption of the Little Sheep noncontrolling interest. These amounts are described in (b), (c), (d), (e) and (f) in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their size and/or nature. These non-GAAP measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Consolidated and Combined Summary of Results and other information presented herein. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures follows.

Quarter ended

Year ended

12/31/16

12/31/15

12/31/16

12/31/15

Detail of Special Items

Reversal of (provision for) losses associated with sales of aircraft(b)

————

(15)

2

(15)

Incremental restaurant-level impairment upon spin-off(c)

(17)

————

(17)

————

Special Items Expense - Operating Profit

(17)

(15)

(15)

(15)

Changes in fair value of financial instruments(d)

21

————

21

————

Tax benefit on Special Items(e)

17

4

16

4

Special items income (expense), net of tax - including

noncontrolling interests

21

(11)

22

(11)

Special items income (expense), net of tax -

noncontrolling interests(f)

————

————

(8)

————

Special Items Income (Expense), net of tax -

Yum China Holdings, Inc.

21

(11)

30

(11)

Weighted average diluted shares outstanding

379,915,075

363,758,219

369,143,838

363,758,219

Special Items Diluted Earnings (Loss) Per Common Share

0.06

(0.03)

0.08

(0.03)

Reconciliation of Reported Operating Profit

to Operating Profit Before Special Items

Reported Operating Profit

58

5

640

488

Special Items Expense - Operating Profit

(17)

(15)

(15)

(15)

Operating Profit before Special Items

75

20

655

503

Reconciliation of Reported EPS to EPS Before Special Items

Reported Diluted Earnings (Loss) Per Common Share

$

0.23

$

(0.08)

$

1.36

$

0.89

Special Items Diluted Earnings (Loss) Per Common Share

0.06

(0.03)

0.08

(0.03)

Diluted Earnings (Loss) Per Common Share before Special Items

$

0.17

$

(0.05)

$

1.28

$

0.92

Reconciliation of Reported Effective Tax Rate

to Effective Tax Rate Before Special Items

Reported effective tax rate

(8.4)%

437.4%

23.5%

33.9%

Impact on tax rate as a result of Special Items

(20.6)%

257.1%

(2.7)%

0.2%

Effective tax rate before Special Items

12.2%

180.3%

26.2%

33.7%

Reconciliation of Reported Net Income (Loss) to Adjusted EBITDA

(amounts in US$ million, except per share amounts)

(unaudited)

Reported net income (loss), along with the reconciliation to Adjusted EBITDA, is presented below.

Quarter ended

Year ended

12/31/16

12/31/15

12/31/16

12/31/15

Reconciliation of Reported Net Income (Loss) to Adjusted

EBITDA

Net Income (Loss) - Yum China Holdings, Inc.

$

88

$

(29)

$

502

$

323

Net income - noncontrolling interests

2

————

12

5

Income tax (benefit) provision

(7)

38

158

168

Interest income, net

(4)

(4)

(11)

(8)

Change in fair value of financial instruments

(21)

————

(21)

————

Reported Operating Profit

58

5

640

488

Depreciation and amortization

130

140

402

425

Store impairment charges

27

43

70

70

Special Items Expense - Operating Profit

17

15

15

15

Adjusted EBITDA

$

232

$

203

$

1,127

$

998

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

Quarter Ended 12/31/16

KFC

Pizza Hut

Casual Dining

Others

Corporate

and

Unallocated

Total

Total revenues

$

1,371

$

521

$

86

$

————

$

1,978

Company restaurant expenses

1,178

466

80

————

1,724

General and administrative expenses

60

26

10

57

153

Franchise expenses

18

2

————

————

20

Closures and impairment expenses, net

16

7

2

17

42

Refranchising gain, net

————

————

————

(7)

(7)

Other income, net

(7)

————

(5)

————

(12)

1,265

501

87

67

1,920

Operating Profit (Loss)

$

106

$

20

$

(1)

$

(67)

$

58

Quarter Ended 12/31/15

KFC

Pizza Hut

Casual Dining

Others

Corporate

and

Unallocated

Total

Total revenues

$

1,430

$

524

$

94

$

————

$

2,048

Company restaurant expenses

1,261

494

93

————

1,848

General and administrative expenses

54

24

9

50

137

Franchise expenses

21

————

————

————

21

Closures and impairment expenses, net

33

7

2

————

42

Refranchising gain, net

————

————

————

(6)

(6)

Other income, net

(7)

————

(3)

11

1

1,362

525

101

55

2,043

Operating Profit (Loss)

$

68

$

(1)

$

(7)

$

(55)

$

5

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated and Combined Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See Reconciliation of Reported Results to Non-GAAP Measures.

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

Year ended 12/31/16

KFC

Pizza Hut

Casual Dining

Others

Corporate

and

Unallocated

Total

Total revenues

$

4,696

$

1,774

$

282

$

————

$

6,752

Company restaurant expenses

3,826

1,524

261

(1)

5,610

General and administrative expenses

161

80

30

153

424

Franchise expenses

68

3

————

————

71

Closures and impairment expenses, net

41

17

3

17

78

Refranchising gain, net

————

————

————

(15)

(15)

Other income, net

(45)

————

(6)

(5)

(56)

4,051

1,624

288

149

6,112

Operating Profit (Loss)

$

645

$

150

$

(6)

$

(149)

$

640

Year ended 12/31/15

KFC

Pizza Hut

Casual Dining

Others

Corporate

and

Unallocated

Total

Total revenues

$

4,768

$

1,825

$

316

$

————

$

6,909

Company restaurant expenses

4,032

1,599

300

————

5,931

General and administrative expenses

150

73

28

144

395

Franchise expenses

70

————

————

————

70

Closures and impairment expenses, net

50

8

6

————

64

Refranchising gain, net

————

————

————

(13)

(13)

Other income, net

(33)

————

(4)

11

(26)

4,269

1,680

330

142

6,421

Operating Profit (Loss)

$

499

$

145

$

(14)

$

(142)

$

488

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated and Combined Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See Reconciliation of Reported Results to Non-GAAP Measures.

Notes to the Consolidated and Combined Summary of Results, Consolidated and

Combined Balance Sheets

and Consolidated and Combined Statements of Cash Flows

(amounts in US$ million)

(unaudited)

(a)

Amounts presented as of and for the quarter and year ended December 31, 2016 are unaudited, and the Company's Annual Report on Form 10-K for the year ended December 31, 2016 may contain updates to the information disclosed in this press release.

(b)

During 2015, we made the decision to dispose of a corporate aircraft in China and recognized a loss of $15 million associated with the planned sale of the aircraft for the year ended December 31, 2015. We completed the sale during 2016. The sale proceeds of $19 million was greater than the net book value of $17 million of the aircraft at the time of disposal, which resulted in the reversal of $2 million of the previously recognized loss.

(c)

Incremental restaurant-level impairment represents additional impairment as a result of including the impact from the license fee paid to YUM on the individual restaurants future cash flow, which is equal to 3% of net system sales. Such license fee did not impact the impairment assessment prior to the spin-off as it was considered an intercompany charge at the time, whereas it became a charge from a third party after the spin-off and therefore should be considered in the impairment assessment.

(d)

In connection with the investment agreement with strategic investors entered into on September 1, 2016, the Company issued 19,145,169 shares of common stock on November 1, 2016, subject to post-closing adjustment by December 30, 2016, and warrants to purchase additional shares of common stock. The post-closing adjustment and the warrants were accounted for as derivative instruments and liability-classified equity contracts, respectively. These financial instruments were initially measured at fair value on the date of issuance, with subsequent changes in fair value of $21 million recognized in earnings during the year ended December 31, 2016. No subsequent fair value measurements were recognized after December 30, 2016.

(e)

The tax benefit was determined based upon the impact of the nature of each Special Item tax effected at the 25% China tax rate or the 35% US tax rate, except for the $21 million changes in fair value of financial instruments associated with the strategic investment which resulted in no income tax expense. Additionally, during the year ended December 31, 2016, we recognized a tax benefit of $26 million related to the legal entity restructuring of our Little Sheep business. $12 million of this benefit was attributed to previous Little Sheep impairment losses recognized within Special Items in 2013 and 2014 and as such was classified as a Special Item consistent with the classification of those historical impairments.

(f)

During the year ended December 31, 2016, the Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to the Company pursuant to their redemption rights. The difference between the purchase price of less than $1 million, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable noncontrolling interests was recorded as an $8 million loss attributable to noncontrolling interests.